Facts
- WCP Ltd aimed to become a wholly owned subsidiary of its parent company, Industrial Equity Limited (IEL).
- To achieve this, WCP proposed amendments to its articles of association permitting IEL to compel minority shareholders, including Mr. Gambotto, to sell their shares.
- The justification provided for the amendment was that full ownership would lower costs and tax liabilities.
- Mr. Gambotto, a minority shareholder, challenged the legitimacy of the constitutional change.
Issues
- Whether a company’s constitution can be lawfully amended to permit compulsory acquisition of minority shares by the majority.
- Whether the amendment served a proper purpose directly advancing the company’s interests.
- Whether the amendment unduly and unjustly harmed minority shareholders.
Decision
- The High Court found that a constitutional amendment enabling compulsory acquisition of shares is lawful only if it serves a genuine and proper purpose required for the company.
- The Court determined that the cost and tax benefits cited largely advantaged IEL, not WCP itself, and did not provide adequate justification for forcing minority shareholders to sell their shares.
- The amendment was found to unjustly harm the minority, as it stripped Mr. Gambotto of ownership rights without sufficient company-focused rationale.
- The Court ruled that the majority bears the burden of establishing both a proper purpose and fairness in process and compensation when proposing such constitutional changes.
Legal Principles
- Amendments to a company’s constitution allowing compulsory share acquisition must be for a proper purpose—specifically, a purpose necessary to advance the company’s interests, not just those of the majority.
- Such amendments must not cause unjust harm to minority shareholders; fairness in procedure and value is required.
- The majority must demonstrate both the necessity of the amendment for the company and that the process and consideration provided are just.
- Subsequent cases have affirmed that compulsory acquisitions can be valid if they are genuinely necessary for corporate benefit and are executed fairly.
Conclusion
The High Court in Gambotto v WCP Ltd established stringent limits on constitutional amendments enabling compulsory acquisition of minority shares: changes must be necessary for legitimate company purposes and must not unjustly harm minority shareholders. The ruling offers significant protection to minority interests and continues to influence Australian corporate law.